Ascending Wedge Pattern
The ascending wedge pattern (more often referred to as the rising wedge pattern) trading strategy refers to a rather bearish trading phase where the trade in question is likely headed in a downward direction. Herein you have wedges that slope upwards with an impending downward spiral going forward.
This pattern is best understood when looked at with the help of two straight lines along both sides of the trading chart as seen below – you will clearly note both to be moving in an upwardly direction while converging at the top. This is because while the bearish phase starts out rather wide at the bottom, the trading range narrows at the top with upward movement in prices.
Rising Wedge Pattern
It is clearly apparent in the above chart that after the preceding bullish trend, there is an ascending wedge pattern formation indicative of a bearish phase.
There are distinct characteristics indicative of the presence (or subsequent emergence) of an ascending wedge pattern. Keeping these characteristics in mind will help you identify them (or forecast them) as the case may be.
Firstly, it has been noted that there is a clear trend at play prior to the reversal with the actual rising wedge typically taking shape over a 3 – 6 month period.
Then the upper resistance line has been observed to take two reaction highs to take shape while the lower support line has also been noted to involve at least two reaction lows.
With impending maturity of the two resistance and support lines, there is convergence noted in the pattern – as can be seen in the above chart. The lines first start out wider and gradually converge towards one another.
Further, while the fact that this pattern is indicative of a bearish phase has already been asserted, the actual bearish phase only comes to the fore when the support line is emphatically broken. Therefore as a savvy investor, if you are on the lookout for a bearish phase, you might want to wait it out till the support line is broken with complete conviction.
Making the most of the ascending wedge pattern
Capitalizing on the ascending wedge pattern mandates selling at prices where buyers lose momentum; already persistent upward movement in prices implies that there is no further scope for increase in prices. That is where sellers come to the fore bringing down prices rather dramatically.
As a savvy trader you can make the most of the situation to sell your trades and cash in on the rise in prices. Short sales under such circumstances are best made where the bottom of the wedge breaks. Concurrently, this is in conjunction to where you will be placing your stop loss – at the top of the rising wedge. See the chart below for a very good perspective on this
Ascending Wedge Pattern
As you can see, the point showcased in the chart as “Target” is where you need to try and make your sale to cash in.
As a cautionary note, keep in mind trade volumes as indicators of a breakout in the pattern. Essentially, this is most likely to happen when there are high volumes with intense trading sessions. Under such circumstances, it is quite possible that there will be an eventual break from the ascending wedge pattern.
The rising wedge pattern is indicative of an ideal selling scenario, either subsequent to an uptrend or when there is an active downtrend already taking place.
The decision to sell and cash out is best placed when the price on the bottom wedge falls below it or when there is stubborn resistance in price whereby it does not go any further below the trend line.
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